Potential of asset-backed securities for private investors

Diplomarbeit von Christiane Schumacher

Abstract:

Asset-backed securities (ABS) are an innovative capital market instrument, and can be defined as homogenous, financial, cash flow producing, illiquid assets, which are separated from other company assets, transferred to a third party and used as collateral for securities issued on the capital market.

The question to be answered in this study is: In how far does the market segment of asset-backed securities contain potential for private investors as an interesting investment alternative? This is of interest for commercial banks for broadening their investment product range and following innovation in order to stay competitive in a highly contested market. The empirical research consists of exemplary case studies of recent ABS issuances, dialogs with experts in the field of asset securitization and complementary data on the current market situation.

After a close examination of the obtained data, the conclusion to be drawn is that asset-backed securities are an interesting investment alternative for private investors and the market segment can be entered indirectly through mutual funds, since a direct investment is hindered by several market conditions. The positive risk-return ratio in comparison to other alternatives and the innovative character of ABS makes them an attractive component of private investment portfolios. In the light of a trade tax law change in favor of special purpose vehicles for true sale transactions and plans for a common ABS platform by several large German banks, commercial banks should consider launching ABS mutual funds and marketing them to retail clients in order to profit from the positive side effects on the investment business from growing supply on the credit side of this market segment.

Table of Contents:

1.	INTRODUCTION	1
1.1	Background	1
1.2	Previous research in the field of asset securitization	3
1.3	ABS - a suitable investment product?	4
1.4	Problem statement	5
1.5	Objective of the study	6
1.6	Detailed research questions	6
1.7	Scope and limitations of the study	7
1.8	Outline	7
2.	THEORETICAL FRAMEWORK	9
2.1	Asset-backed securities - concepts and structure	9
2.2	Classification of asset-backed securities	12
2.3	Risks and credit enhancement	13
2.4	Investor perspective on ABS	15
2.5	The magic triangle - basis of investment decisions	16
2.6	Marketing context of the study	17
2.7	Consumer segmentation	17
2.8	Investor segmentation	20
2.9	Summary	22
3.	METHODOLOGY	23
3.1	Research purpose	24
3.2	Research approach	24
3.3	Research strategy	24
3.4	Data collection	25
3.5	Data analysis	27
3.6	Reliability and validity	27
3.6.1	Construct validity	27
3.6.2	Internal validity	28
3.6.3	External validity	28
3.6.4	Reliability	28
4.	EMPIRICAL FINDINGS	30
4.1	Market overview	30
4.2	Expert dialogs	34
4.2.1	Interview H. Wellmann, Director of funding advisory, Dresdner Kleinwort Wasserstein	35
4.2.2	Interview D. Graf Droste zu Vischering, ABS & CDO, HSBC Trinkaus & Burkardt	38
4.2.3	Interview H. Erasmus, financial advisor at Commerzbank AG	42
4.2.4	Summary	44
4.3	Case studies	45
4.3.1	PROVIDE-A 2001-1 PLC: German RMBS with a credit default swap	45
4.3.2	PROMISE-I 2000-1 Plc: German CLO of Mittelstand (SME) loans	47
4.3.3	Free Mobility No. 1 Limited: ABS of auto mobile loans	49
4.3.4	CAST 1999-1: Synthetic German Corporate Loan Credit-linked Notes	51
4.4	Summary	53
5.	DATA ANALYSIS	54
5.1	Comparison and evaluation of case studies	54
5.2	Comparison and evaluation of expert dialogs	57
5.3	Choice of target customer segments	63
5.4	Suggestions for the marketing implementation	65
6.	CONCLUSIONS	67